A few weeks back, I attempted to slam the supply chain door on common labor-based manufacturing sourcing decisions involving cheap locales and then linking the death of LCCS to a broader trend in labor arbitrage-based BPO. This is easier said than done in a few hundreds words. Yet the evidence that business process outsourcing (BPO) for procurement predicated on low-cost labor from India or other reasons will continue to thrive is waning. And there are many early warning signals that would suggest the market is in fact moving in a different direction, where Indian BPOs are playing to potentially a more sustainable source of competitive advantage than cheap (and often all-too-mobile) labor alone.

One example is Infosys' bet on platform as a service (PaaS) as a major element of its procurement offering going forward. Infosys is already working with at least one Fortune 100 company to deliver a platform-based solution more similar to what an SAP/Ariba might provide than a BPO. Moreover, the business model also includes potential supplier-funded elements within the program. Those in the procurement software space may be quick to discount Infosys as a major potential competitor directly, but whether the larger outsourcer/BPO opts to focus on purchasing, customizing and configure existing tools, building new capability organically, acquiring it or some combination of all of these areas, the industry should stand up and take note.

Infosys is the most proactive of the Indian procurement BPOs in shifting its business model to a platform-driven approach and away from labor arbitrage (or at least labor as the forefront component -- less expensive labor could easily sit in the back-office in terms of configuration). Yet we believe others are likely to head down this path as well, owing in large part to wage pressure and the challenge of keeping key delivery-focused staff members. The amount of job-hopping in India in skilled procurement jobs is significant, outpacing the standard churn for IT-centric positions. AON Hewitt notes in a recent survey that Indian annual salary increases are the highest in the Asia Pacific region (11.9% in 2012). For skilled procurement and IT-centric procurement jobs, our thumb in the air would put in the number closer to 15%.

But perhaps the most important reason we see Indian BPOs shifting away from labor cost arbitrage has little to do with playing to true potential competitive advantage (e.g., IT skills) or a challenging wage and skills environment. No, it's that traditional BPO deals playing to India's scale advantage for back-office mobilization simply aren't there. The business model for procurement BPO is shifting to smaller deals (at least as a foundation for engagement) often predicated on deep subject matter expertise (e.g., category knowledge) or highly specialized skill sets. The one exception to this tends to be cases where an incumbent provider with a relationship in a different area of the business (e.g., Accenture) has the ability to come in initially and still sell a large relationship in procurement.

Of course these are all of the politically correct angles on why this shift is happening. I could be slightly more crude and stereotypical (and likely just as accurate) by suggesting that Western companies, especially procurement organizations within them, are fed up with the cultural differences that Indian services providers bring on the sales and delivery angle (e.g., Indian BPOs often don't know when to say "no" around procurement topics, which hurts everyone in the engagement process, compared with Western firms which tend to be more honest about their strengths and core competencies). But this point is actually less important than the others.

So mark our words. Indian-based labor cost arbitrage BPO for procurement is a dying model that the most advanced procurement organizations have realized already. If you're engaged with an offshore BPO at the moment in procurement, even in transactional activities, and your partner is not bringing specialized expertise, platform capability or scale, we would recommend investigating alternative options – including with other Indian firms who see the labor cost arbitrage writing on the wall and are capable of being honest and forward about the future of sustainable competitive advantage.